Optimism is a Wealth Magnet

This is about an interesting interview from the September 2009 Journal of Financial Planning between Shelley Lee with Jean Chatzky. Jean Chatzky is a journalist, author, motivational speaker, and the financial editor for NBC’s Today Show. Her opinion is that optimism is a wealth magnet. Jean Chatzky’s a clear, straightforward financial journalist for regular folks. Her quest to continually learn more about how to help people reach financial security led to her latest book, The Difference, which was released in April 2009.

Jean found that people ask themselves all the time what’s the difference between me and my boss or neighbors since they have it so good, so she wanted to find the answer, too, especially since 75 percent of wealthy families in the U.S. didn’t start out that way. What she found that being born with money or inheriting it are not key at all. Some of the more interesting surprises included personality traits of being confident, happy, optimistic, competitive, and non financial behaviors of socializing with friends at least once a week, exercising two to three times a week and reading newspapers regularly.

Research clearly showed that there were seven distinct traits of the wealthy personality that included optimism, resilience, connectedness, drive, curiosity, intuition and confidence. While some of those may not be surprising, drive and confidence, for example, she found it extremely notable that intuition, curiosity and optimism were so important. Most wealthy individuals read and learn constantly and report that their parents read to them when they were a child. They trust their intuition and optimism is an expectation that good things are going to be plentiful, that life will bring good rather than bad outcomes. Optimism is a wealth magnet. Her theme is that happiness is short term, optimism is forward thinking, and research has shown that people who are considered blissfully happy or blissed out often have had bad financial habits. So you have to be appropriately happy. Moderation is the key. Some of the newer research indicates we’re born with about 50 percent of the resilience, optimism and intuition we can have. The rest of it is in our control to be developed and practiced. Her feeling is happiness is a choice and prosperity is a habit and learned behavior.

She said you may hear people talking of the current downturn in the same way as those who survived the Great Depression. She hopes we’re going to produce a generation of better savers. Her feeling is we know from neuro-economics that the brain doesn’t like saving as much as it likes instant gratification. We all hope this newfound savings behavior will last.

At Sound Financial Planning we believe that we are in a new paradigm in the U.S. economy, and hopefully many consumers will learn the lessons that there is a big difference between what our basic needs are and what our wants are and that in the past the U.S. economy was driven approximately 70 percent by consumers. For a healthy economy it should be the exact opposite, 30 percent should be driven by U.S. consumers and the other 70 percent by long-term investment and saving. In this scenario we would have a far more stable, healthy economy in the long run. As always, if you have any questions or comments please contact us.

Sincerely,

William T. Morrissey, CFP

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Friends or family need a little extra help? To refer a client, call us and we will help you get your friends and family members on-board with our services. To learn more about the types of clients we serve, visit our website at www.SoundFinancialPlanning.net .

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Sound Financial Planning, Inc.
www.SoundFinancialPlanning.net
Primary Office
321 West Washington St., Suite 329
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022


PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

POINT COUNTERPOINT ON BUY AND HOLD VERSUS TACTICAL ALLOCATION

We wanted to communicate to you two different opinions regarding whether buy and hold still makes sense versus a more active approach to asset allocation. There was a very interesting article in the Journal of Financial Planning in our October issue regarding an interview by Shelly Lee with John Bogle who is 80 is and was the founder of the Vanguard Mutual Fund Group in 1974 and has been one of the world's most powerful and influential people. He has just written a book called Enough which is about an important concept about coming to grips with what you really want and need in life and your responsibility to self, family, career and community. It's particularly important now because our society has lost its bearings a bit. The financial sector has almost totally lost its bearings.

John Bogle made some comments regarding whether buy and hold was too simplistic for today's environment. His opinion is it's not dead and advisors know that and it's the journalists who are asking the question. His opinion is it's absurd to think that buy and hold is dead. In his opinion, the simple truth is that long-term investors win as a group and short-term investors lose as a group. It's pretty black and white. Another question that was asked is if free market capitalism still works. He said that yes we have a crisis and failure of capitalism at this point and time. Free markets can get abused easily by overreaching money managers, financial managers, bank managers and corporate managers who have put their own interests ahead of the interests of those they're supposed to represent. Mr. Bogle also believes it's important we return to a long-term mentality and honor our obligations to participate in corporate governance and then things will improve.

Now we'd like to share with you a counterpoint from Mohamed El‑Erian’s comments at the Schwab conference in September. Mohamed is the CEO and co‑CIO of the global mutual fund manager PIMCO, was with the International Monetary Fund for 15 years, has a doctorate in economics from Oxford University, and was the manager of the Harvard Endowment for several years. In his opinion in the narrowest sense the U.S. financial system is safe and he no longer believes there will be a repeat of the cataclysmic events of last September and October 2008. In a broader sense though he feels the global economy still faces many risks. He feels we're dealing with the solvency of large institutions and have inadvertently accelerated redesign of the global economy. What's more we are doing so in the context of a shrinking pie. The global economy is contracting. The government's new ownership stakes in numerous companies has fundamentally changed its role. Once a referee, it's now a player in his opinion.

The biggest lesson of the financial crisis he felt is that diversification is a necessary but not sufficient condition for maintaining adequate portfolio performance. He believes investors need more than just conventional diversification. Diversification in his opinion is no longer just about asset classes. Investors must recognize the markets will under and overprice certain kinds of risks and they won't necessarily do so at the asset class level. Over the next five years he said these considerations will become more important than asset class diversification. He felt it didn't matter what market you were in when the crisis hit. He said all markets collapsed with the exception of government bonds and high-grade investment bonds and treasuries. When the markets recovered, however, it mattered greatly where one was invested so the healthiest markets performed best. El-Erian cited some other reasons for the crisis. The policymakers must recognize that financial innovations like securitization will always be overproduced and overconsumed and that we must have a strong infrastructure to support innovation. Financial institutions must recognize that incentives matter but compensation must be structured to reward managers for long-term though and not short-term results.

Mohamed noted that investors must ensure against extreme adverse outcomes, noting that PIMCO has recently introduced funds that hedge against the worst outcomes. As many of our clients know we are using some of those funds to ensure against worst outcomes in our client portfolios as an additional hedge. In the future he feels the global economy will be driven by the economies of China, Brazil and other emerging markets rather than the US consumer. This transition to a global economy will take place in his opinion over the next 20 to 30 years and may not be a smooth one. He also noted that inflation is not a concern at this point in time because demand for goods is far less than the supply. It's very difficult to generate inflation with these conditions. Stagflation, which is slow growth combined with inflation, may emerge at some point and he said it's starting to show up in some industries.

We thought it would be beneficial for you to hear these two different points of view in the investment world from John Bogle and Mohamed El-Erian. Our belief is that you can incorporate a little bit of both. We still believe strongly in modern portfolio theory and broad asset class diversification but we also believe that overlaying that with appropriate hedging strategies makes sense. In the new normal, as Mohammed calls the economy that we're in today, we believe it makes sense to overlay some of these hedging strategies on top of a broadly diversified portfolio with safe or conservative bond funds as well to stabilize the risk. If you have any questions or would like further information, please don't hesitate to contact us.

Sincerely,
William T. Morrissey, CFP®

Friends or family need a little extra help? To refer a client, call us and we will help you get your friends and family members on-board with our services. To learn more about the types of clients we serve, visit our website at www.SoundFinancialPlanning.net .

Sound Financial Planning, Inc.
www.SoundFinancialPlanning.net
Primary Office
321 West Washington St., Suite 329
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

Economic Recovery: What advisors heard at the Financial Planning Association (FPA) Conference

We wanted to review with you some interesting information we heard at the conference that Bill just returned from sponsored by the Financial Planning Association in Anaheim, California. There was a prominent economist who was quite interesting whose name is Marci Rossell. She was the chief economist for CNBC and was an economist at the Federal Reserve Bank of Dallas, as well. She gave some very interesting comments regarding the economy that I thought would be worth sharing with all of our clients and friends.

She said in a financial crisis there are three phases. The first phase or pre‑phase was the credit crunch before the crisis actually happened. The second was the containment phase in which the government had the attitude that “big institutions were too big to fail.” The failure of Lehman Brothers really exacerbated the crisis. At that point, the rule book went out the window and really accelerated the crisis. The third phase is the resolution phase where the Fed pumped in the economy significant amounts of money to stimulate the economy.

Marci said there were three categories of spending. First was the financial stabilization of the economy, which had to be done. The second was what she called cash for everything which included “cash for clunkers” and the $8,000.00 homeowner's credit. [The cash for clunkers program was a net cost to taxpayers of $2000 per car] She feels both were a waste and unnecessary and really didn’t help the economy. We agree and feel it's only a short-term fix. The third is the economy of war, which contributes 2 trillion dollars of the deficit regarding Iraq and Afghanistan.

In her opinion, the economic recovery began in early September 2009. The unemployment rate always continues to rise after the end of a recession. She calls this a jobless recession. By extending unemployment benefits in a recession, it always extends the period of unemployment. She feels we are in a recovery because oil prices bottomed in March 2009 at approximately $30.00 a barrel and is now $73.00 a barrel. Oil prices are always a leading indicator of the economy improving or recovering. She said there has been a radical increase in savings rate to 6 percent from a negative savings rate in a very short period of time. That's a very good sign and far better than conspicuous spending of the past.

She thinks the real estate markets are starting to stabilize and close to fair value. The median house is finally affordable for median income buyers. It usually takes ten years to climb back in real estate prices from a market bottom and her opinion is the peak was 2006 so that she doesn't expect real estate prices to really increase until 2016. So, basically no growth until then. That's consistent with some of the comments that we have heard from others. At this point, she's not concerned about deflation. She said prices always fall in a recession in the short run and allows the economy to recover. She feels it is a self correcting mechanism. In her opinion, what drives growth is corporate profitability. She expects inflation to be 3 to 4 percent maybe in 2010 because when so much money goes into the economy it will stimulate at least some inflation. [That seems to be in conflict with what we heard an economist say last May who felt that there wasn’t going to be any inflationary pressure until probably 2015 because we wouldn’t reach full employment until then. Obviously, not every economist agrees on this.

She felt that the U.S. dollar has dropped drastically over the last six months, but the dollar is just going back to its normal level after the financial crisis. The decline in the U.S. dollar benefits our exports and helps drive the economic recovery. She thinks we will have an export driven recovery. She does expect the dollar to continue as the reserve currency.

She felt that income taxes will have to go up and there won't be any choice. Taxes will have to increase or our interest rates will go sky high. She feels the federal budget deficit needs to be dealt with. She feels the government should force people to obtain health insurance. Young people would go into a pool and make it far better for all of us. She doesn't expect much from healthcare reform. She feels they should eliminate the employer tax break for health insurance and feels that health insurance shouldn't be tied to the employer at all.

The second speaker was David Walker who is from the Peter G. Peterson Foundation. Their website which you might find interesting is pgpf.org. His talk was “America on the Brink of Financial Crisis”. He was the most recent comptroller general of the United States and he is the CEO of the Peter G. Peterson Foundation. He has traveled the country on a fiscal wakeup tour and his tour has been chronicled in the critically acclaimed documentary I .O.U.S.A. which was released in the summer of 2008. He combined a realistic analysis of the financial crisis facing America with an optimistic faith in our country's ability to overcome this enormous challenge if we, the people, wake up and do our part.

He said our current national debt of 11 trillion is cause enough for major concern, but that figure doesn't account for the gap between future promised and unfunded Social Security and Medicare benefits, as well as a range of other commitments and contingencies the federal government has pledged to support. With known demographic trends and skyrocketing health costs and with baby boomers, who represent one‑quarter of the U.S. population, that will put significant pressure on Social Security and especially Medicare, given rapidly rising healthcare costs. Unfortunately, younger workers, our children and grandchildren, will ultimately have to foot the bills. His opinion is we will need to mend our fiscally irresponsible ways, change current federal programs and tax policies, and create a climate that is more favorable to future economic growth and good government.

In his opinion, what needs to be done is that elected officials must start to close the gap between spending and revenues that results primarily from large and growing unfunded promises for Medicare and Social Security. Projections show that by 2028 revenues of about 18 percent of GDP, the level we are used to, will not even cover net interest, Social Security, Medicare and Medicaid. The federal government will have to borrow to pay for all those activities, including education, national defense and homeland security. Otherwise, in his opinion we would have to do without these programs. He feels we need to implement statutory budget controls that address discretionary and mandatory spending, as well as tax preferences both in the short-term and over time. He felt we need to pursue comprehensive tax reform that makes the system more streamlined, understandable, equitable and competitive while also generating adequate revenues. He feels the need to reprioritize and reengineer the base of the federal government to focus on the future and generate real results. He feels we will have to achieve Social Security reform that makes the program solvent, sustainable, secure and more savings oriented. He feels the need to reduce the rate of increase in healthcare costs and more effectively target related taxpayer subsidies and tax preferences. He also felt that we'll need to pursue comprehensive healthcare reform that addresses coverage, cost, quality and personal responsibility and ensure that we will have processes that will enable us to achieve the above objectives within a reasonable period of time.

As always, if you have any questions or comments please don’t hesitate to contact us.

Sincerely,
William T. Morrissey, CFP

__________________________________________________________

Friends or family need a little extra help? To refer a client, call us and we will help you get your friends and family members on-board with our services. To learn more about the types of clients we serve, visit our website at http://www.soundfinancialplanning.net/ .
__________________________________________________________

Sound Financial Planning, Inc.
http://www.soundfinancialplanning.net/
Primary Office
321 West Washington St., Suite 329
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022

PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.